The Role of Bank as Trustee

By Sumit Kumar Suman, CNLU


The relationship of banker and customer is not something which is static but is a relationship which on many occasions changes its color from one relationship to another. In a normal course of business, the basis of banker and customer relationship is contractual, and it is the contract which governs the obligations of the parties. The apparent and most obvious benefit that one derives by impleading the bank liable as a trustee is of separation of funds from the general assets of a bank so as to claim preferential right in the event of bankruptcy.

As soon as we open an account in a bank or the banker issue a draft or we deposit our valuables in a bank, a relationship is created with the bank at that moment. However, the relationships are not the same in all cases.  It means that for the different functions of banks, the nature of the relationship between the banker and the customer varies. In this unit, we will discuss the relationships between the banker and the customer where the role of the bank as a trustee.[i]

For instance: A trustee holds property for the beneficiary, and the profit earned from this property belongs to the beneficiary. If the customer deposits securities or valuables with the banker for safe custody, banker becomes a trustee of his customer. The customer is the beneficiary so the ownership remains with the customer.

So basically, this paper seeks to examine the circumstances under which a bank may be held liable as a trustee. This paper shall examine the various such circumstances under two broad heads. It discusses the various judicial principles evolved over a period of time, within the ambit and scope of which the banker can be fastened with the liability as a trustee. It also discusses various statutory provisions which relate to the bank’s liability as a trustee.

 Historical background of banking system

Banking is today an integral part of our everyday life: At home, at school, at the office, at business, on travel everywhere we counter some aspect of banking. The significance of banking in our day to day life is being felt increasingly. What are the institutions, so inevitable in the present day set up? How do they transact? How did the concept emerge?

These are some of the simple queries that do not surface in our minds but are lurking deep down. Money plays a dominant role in today’s life. Forms of money have evolved from coin to paper currency notes to credit cards. Commercial transactions have increased in content and quantity from simple banker to speculative international trading.

Hence the need arose for a third party who will assist smooth banding of a transaction, mediate between the seller and buyer, hold custody of money and goods, remit funds and also to collect proceeds. He was the “banker”. As the number of such mediators grew there is a need to control.

Such mediating agencies gave birth to the concept of “banks” and “banking”. With the exception of the extremely wealthy, very few people buy their homes in all-cash transactions. Most of us need credit in form of loans, to make such a large purchase.

In fact, many people need financial support from the Bank to fulfill the financial requirement. The world as we know it wouldn’t run smoothly without credit and banks to issue it. In this article, we’ll explore the birth of this flourishing industry.[ii]

Banking history is interesting and reflects the evolution of trade and commerce. It also throws light on living style, political and cultural aspects of civilized mankind. The strongest faith of people has always been religion and God. The seat of religion and place of worship were considered a safe place for money and valuables. Ancient homes didn’t have the benefit of a steel safe, therefore, most wealthy people held accounts at their temples.

Numerous people, like priests or temple workers, were both devout and honest, always occupied the temples, adding a sense of security. There are records from Greece, Rome, Egypt, and Ancient Babylon that suggest temples loaned money out, in addition to keeping it safe.

The fact that most temples were also the financial centers of their cities and this is the major reason that they were ransacked during wars. The practice of depositing personal valuables at these places which were also functioning as the treasuries in ancient Babylon against a receipt was perhaps the earliest form of “Banking”.

Gradually as the personal possession got evaluated in term of money, in form of coins made of precious metal like gold and silver, these were being deposited in the temple treasuries. As these coins were commonly accepted form of wealth, ‘lending’ activity to those who needed it and were prepared to ‘borrow’ at an interest began.

The person who conducted this ‘lending’ activity was known as the “Banker” because of the bench he usually set. It is also observed that the term ‘bankrupt’ got evolved then as the irate depositors broke the bench and table of the insolvent banker.

With the expansion of trade, the concept of banking gained greater ground. The handling of “banking” transcended from individual to groups to companies. Issuing currency was one of the major functions of the banks. The earliest form of money – coins, were a certificate of value stamped on metal, usually gold, silver, and bronze or any other metal, by an authority, usually the king. With the increasing belief and faith in such authority of their valuation and the necessities of wider trade, a substitute to metal was found in the paper.

The vagaries of monarchial rule led to the issues of currency being vested with the banks since they enjoyed faith, controlled credit, and trading. All forms of money were a unit of value and promised to pay the bearer of specified value. Due to failure on account of unwise loans, to rule and organize, a stable banking system arose. The word’s earliest bank currency notes were issued in Sweden by stock holms Banco in July 1661.

History of Banking in India

The story of Indian coinage itself is very vast and fascinating and also throws tremendous light on the various aspects of life during different periods. The Rig Veda speaks only gold, silver copper and bronze and the later Vedic texts also mention tin, lead, iron, and silver. Recently iron coins were found in very early levels at Attranji Kheri(U.P.) and Pandu Rajar Dhibi (Bengal). A money economy existed in India since the days of Buddha.

In ancient India, during the Maurya dynasty (321 to 185 BC), an instrument called adesha was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we understand it today.

During the Buddhist period, there was considerable use of these instruments. Merchants in large towns gave letters of credit to one another. Trade guilds acted as bankers, both receiving deposits and issuing loans. The larger temples served as bankers and in the south the village communities economically advanced loans to peasants. There were many professional bankers and moneylenders like the Sethi, the word literally means “chief”.

It has survived in North India as seth. Small purchases were regularly paid for in cowry shells (varataka), which remained the chief currency of the poor in many parts of India. Indigenous banking grew up in the form of rural money lending with certain individuals using their private funds for this purpose. The scriptures singled out the vaishyas as the principal bankers. The earliest form of Indian Bill of Exchange was called “Hundi”.

Exports and import were regulated by the barter system. Kautilya’s Arthasastra mentions about a currency known as Panas and even fines paid to courts were made by panas. E. B. Havell in his work: The History of Aryas Rule in India says that Muhammad Tughlaq issued copper coin as counters and by an imperial decree made them pass at the value of gold and silver. The people paid their tribute in copper instead of gold, and they bought all the necessaries and luxuries they desired in the same coin.

However, the Sultan’s tokens were not accepted in counties in which his decree did not run. Soon the whole external trade of Hindustan come to a standstill. When as last the copper tankas had become more worthless than clods, the Sultan in a rage repealed his edict and proclaimed that the treasury would exchange a gold coin for his copper ones.

As a result of this thousands of men from various quarters who possessed thousand of these copper coins bought them to the treasury and received in exchange gold tankas. The origin of the word “rupee” is found in the Sanskrit rūpya “shaped; stamped, impressed; coin” and also from the Sanskrit word “rupa” meaning silver.

The standardization of currency unit as Rupee in largely due to Sher Shah in 1542. The English traders that came to India in the 17th century could not make much use of the of indigenous bankers, owing to their ignorance of the language as well the inexperience indigenous people of the European trade. Therefore, the English Agency Houses in Calcutta and Bombay began to conduct banking business, besides their commercial business, based on unlimited liability.

The Europeans with aptitude of commercial pursuit, who resigned from civil and military services, organized these agency houses. A type of business organization recognizable as managing agency took form in a period from 1834 to 1847. The primary concern of these agency houses was trade, but they branched out into banking as aside line to facilitate the operations of their main business. The English agency houses, that began to serve as bankers to the East India Company had no capital of their own, and depended on deposits for their funds.

They financed movements of crops, issued paper money and established joint stock banks. Earliest of these was Hindusthan Bank, established by one of the agency houses in Calcutta in 1770. Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal.

This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India’s independence, became the State Bank of India.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s.

The Comptoir d’Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center.

The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally undercapitalized and lacked the experience and maturity to compete with the presidency and exchange banks.

Swadeshi Movement The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political leaders to found banks for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

Ammembal Subbarao Pai founded “Canara Bank Hindu Permanent Fund” in1906. Central Bank of India was established in 1911 by Sir Sorabji Pochkhanawala and was the first commercial Indian bank completely owned and managed by Indians. In 1923, it acquired the Tata Industrial Bank. The fervor of Swadeshi movement led to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara (South Kanara )district. Four nationalized banks started in this district and also a leading private sector bank. Hence, undivided Dakshina Kannada district is known as “Cradle of Indian Banking”

Development after Freedom

The second milestone in the history of Indian banking was India becoming a sovereign republic. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted in greater involvement of the state in different segments of the economy including banking and finance. The banking sector also witnessed the benefits; Government took major steps in this Indian Banking Sector Reform after independence.

• First major step in this direction was nationalization of Reserve Bank in 1949.

• Enactment of Banking Regulation Act in 1949

• Reserve Bank of India Scheduled Banks’ Regulations, 1951.

• Nationalization of Imperial Bank of India in 1955, with extensive banking facilities on a large scale especially in rural and semi-urban areas.

• Nationalization of SBI subsidiaries in 1959. The government of India took many banking initiatives. These were aimed to provide banking coverage to all section of the society and every sector of the economy.

The Industrial Credit and Investment Corporation of India Limited (ICICI) was incorporated at the initiative of World Bank, the Government of India and representatives of Indian industry, with the objective of creating a development financial institution for providing medium-term and long-term project financing to Indian businesses.

Nationalization Process

Nationalization of banks in India was an important phenomenon. Despite the provisions, control, and regulations of Reserve Bank of India, banks in India except for the State Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy.

At the same time, it had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of India, expressed the intention of the Government of India in the annual conference of the All India Congress Meeting in a paper entitled “Stray thoughts on Bank Nationalization.”

The meeting received the paper with enthusiasm. Thereafter, her move was swift and sudden. The Government of India issued an ordinance and nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969. Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank.

It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. Currently, there are 27 nationalized commercial banks.

Judicial Principles

It must be remembered that mere entrustment of money to the bank does not make the bank trustee. The general presumption of the relationship between the banker and its customer is that of debtor-creditor. To prove that banker was liable as trustee, plaintiffs have to show the existence of those facts which can dispel the general presumption of the debtor-creditor relationship.

In the case of the Official Liquidator v. N Chandranarayan[iii], it was held that the following factors shall be crucial in determining as to whether the presumption of the creditor-debtor stands rebutted or not.

(i) whether the company had a right to embark and utilise the money in its business activities without any restriction or whether the terms of the entrustment stipulate for segregation compelling the company to earmark or set apart the fund for a specific purpose ;

(ii) whether there is a stipulation on the part of the company to pay interest or give some return for the investment;

(iii) whether there is a clear negative obligation on the part of the company not only not to mix up or absorb the fund with the general assets of the company, but to use it for certain specific purposes, coupled with an obligation to return the same in certain contingencies ;

(iv) whether the person who had deposited the fund has an unconditional right to withdraw the amount at his option, etc., etc.

Over a period of time following are the various circumstances under which the banks has been fastened with the liability of the trustee. However, the list is by no means exhaustive.

A.     Trust Accounts

Where a customer deposits money with the bank a debtor-creator relationship is established under which the bank acquires the beneficial title to the funds. The bank is entitled to use the funds in any manner it deems fit. The customer does not acquire any interest or charge over the bank’s general assets and the deposit account is merely an acknowledgement and record of the credit balance standing to the customer’s account.[iv]

Where, however, a bank undertakes to act a trustee and holds deposits on trust, the bank has no power to use those deposits as a part of general assets unless the trust instrument expressly authorizes to do so. In such circumstances, the trust money may solely be applied to the benefit of the beneficiaries of the trust account. The bank, therefore, in such cases cannot discharge its obligation with respect to the trust property by giving an account of the credit balance.

A trust account is an account opened by a customer acting trustee or fiduciary and designated as a trust account or in some other way to indicate its fiduciary nature.[v] To be held liable under this head it is not necessary that the word ‘trust’ appears in the name of the account.[vi] When such word occurs in the name of the account, the bank obviously has the notice of the fact of the existence of the trust.

Opening of account with a name having ‘trust’ as its part operates as an actual notice. However, the liability can also be fixed if the from the circumstances it can be inferred that the bank had the constructive notice of the same. The classic example of such a situation is provided by the case of Re Gross, ex p. Kingston[vii] where the account headed as ‘police account’ was held to be sufficient notice of the trust.

It was observed by Mellish LJ that ‘if an account is in plain terms headed in such a way that banker can not fail to know it to be a trust account, the balance standing to the credit of that account will, on the bankruptcy of that person who kept it belong to the trust’.[viii]

In dealing with trust accounts the bank also has to ensure that the trustees act within the scope of their power.[ix]At this juncture it is important to note that the above-mentioned observation does not suggest that bank should assume the role of a detective. This merely indicates that bank can not wilfully shut its eyes to blatant breach of trust.

The case of Rowlandson and others v. National Westminster Bank Limited[x], provides an example of such situation. Here the entire amount from the ‘trust account’ was transferred into the personal account in the same bank. In the suit brought by the beneficiaries it was held by the chancery division that once the trust account was opened, the bank was under a fiduciary duty to the plaintiffs for that account.

If the bank under the circumstances can not be said to have the knowledge of the trust, it cannot be held liable. The case Thomson v. Clydesdale Bank Ltd,[xi]illustrates the same.

B.     Special Purpose: The Quistclose Trust

When the money is entrusted with the bank for a special purpose, until the fulfilment of the same the funds remain with the bank in its capacity as a trustee. This was the principle that was enunciated by House of Lords in the case of Barclays Bank Ltd. v. Quistclose Investments Ltd.[xii]

In this case a company was promised loan finance if it first obtained finance from another source to pay a share dividend that had already been declared. The respondents pursuant to this made a loan for the amount for the payment of dividend and the cheque was paid into a special account with B bank that was created specifically for this purpose.

When the company went into voluntary liquidation before this dividend was paid, the question with which the court was posed with was whether the investment company had the equitable interest in the money paid over of which the bank had at all the times notice of. It was argued by the respondents that under the equity if A pays money to B upon the terms which are accepted by it that the money will be applied for a specific purpose, B is subject to an obligation to apply the money only for that purpose and cannot himself assert a beneficial title to it and the money is subject to a trust of which B is a trustee.

The House of Lords ruled in the favour of the investment company and noted that the money was never intended to form part of company’s assets but was specifically directed at those entitled to the final dividend. This being the primary trust and since this was no longer possible, it reverted to the respondent according to a secondary or resulting trust to that effect. It was also noted here that the trust and debt relationship could co-exist and the existence of one was not an impediment to the other.

Money Received With Special Instructions

This can be said to be continuation of the preceding subsection. A bank, when receives money with a special instruction to retain the same pending further instructions or to pay over the same to some another person who has no banking account with the bank and bank accepts the instructions and holds money pending directions from such other person or in such circumstances holds the money in its capacity as a trustee.[xiii]

In the case of Indian Hume Pipe Co. v. T N & Q Bank, [xiv]the company had a current account with the Travancore bank at Nagercoil. Company had no account with the Bombay branch. The company had instructed the Bombay branch of the bank to collect a cheque in its favour drawn on Indian National Bank, Bombay and to remit the proceeds to Nagercoil branch to the credit of the company.

Before such transfer bank went into liquidation and the funds remained with the Bombay branch. It was held by the court that the bank was holding his principal’s money for special purpose. The company was held entitled to amount of the cheque. While delivering the judgement the Hon’ble court placed reliance upon an English decision in which a person advanced money to a bankrupt for settling the claims with his creditors. On failure of the purpose, it was held that the repayment of money was protected as the money advanced was for a specific purpose and was clothed with specific trust.

It was observed by the court that had the money been paid into Nagercoil Branch account, the bank’s position would not have been that of the agent and it would have been entitled to control and use of the money, which in turn would have given the official liquidators the right to use the money to pay creditors.

Similarly in the case of the M P Co-operative Bank v. P D Dalal [xv]it was held that when the Bills are handed over to a bank for collection, the Bank is constituted as an agent for their collection after which the relationship between both will depend upon other circumstances.

If the customer has given any specific instruction to the banker with respect to the amount so collected, it is those instructions that will determine the nature of the relationship. If no such instructions are given, the relationship will have to be determined from other circumstances such as whether the customer is a regular customer of the bank having an account with the bank or not etc..

Here the court while giving the judgment relied on the case of Velji Lakhamsey & Co. v. Dr. Banaji.[xvi]In this case it was held that where the customer gives specific instructions to the bank, it acts as an agent and not as a debtor and the agency brings about the fiduciary relationship and it lasts until the agency is terminated.

Another case of considerable importance that the court had relied upon was that of the New Bank of India v. Pearey Lal.[xvii] In this case, plaintiff delivered certain amounts of money to the bank of Lahore for transmission to the bank’s branch at Calcutta with instructions to await the directions of plaintiff regarding the opening of the account for keeping the same in fixed deposit or otherwise in Calcutta branch.

But the plaintiff never gave any instructions for opening any account fixed deposit or otherwise with respect to the amount after they reached Calcutta. The question that arose for determination, in that case, was whether the bank was a trustee for that amount or whether the relationship was that of mere creditor and debtor.

Justice Shah speaking for the Supreme Court held that after the purpose for which the money was entrusted was carried out, in the absence of the further instructions, the defendant did not cease to be a trustee. Here, the fact that bank purported to open a fixed deposit account, in the name of the plaintiff was held to be inconsequential as it was done without the consent of the plaintiff.

In the case of the Official Assignee v. Natesam Pillai[xviii]it was held that where the amount was credited in anamath or suspense account to await instructions of the creditor as regards their disposal and the regular procedure of giving the passbook was not followed by the bank nor any agreement with respect to payment of interest on deposit is entered into by the parties, the amounts must be deemed to have been received  by the bank  in fiduciary capacity and not as between bank and its customer.

Another important observation that was made in this case was that the mere fact that the plaintiff had no prior transaction with the bank is not sufficient to warrant the presumption of the fiduciary relationship.

Similarly in the case of Valaja Govinda Saravanabavananthan  v. The Exchange Bank of India and Africa Ltd[xix] It was held that when the bills were collected, in as much as the appellant had given no instructions to the Bank as to what should be done with those proceeds, the Bank became entitled to use these proceeds for its ordinary business. These proceeds became the ordinary assets of the Bank and these proceeds were not impressed with any trust.

The position would have been different if the appellant had given instructions to the Bank to the effect that after the bills were collected the Bank should either keep this money for him or should pay them to someone else or do something definite or specific with regard to these proceeds.

But in the absence of any instructions the function of the Bank as an agent for the collection came to an end when the bills were collected, and the sale proceeds not being impressed with any trust the Bank became entitled to use those sale proceeds for its ordinary business. On these lines of reasoning, on the facts beforehand it was held that the Bank became the debtor of the appellant as soon as the bills were realized.

This case seems to have been overruled by the Supreme Court in the matter of Pearey Lal to the extent that in the absence of any instructions the function of the Bank as an agent for the collection came to an end when the bills were collected. As mentioned earlier in the matter of Pearey Lal it was observed by justice Shah that after the purpose for which the money was entrusted was carried out, in the absence of the further instructions, the defendant did not cease to be a trustee.

It was held by the court that it is not true that the bank whenever collects bills as an agent for its customer holds the proceeds as a trustee. It is a trustee so long as the bill is not realized or not collected. But as soon as the bill is collected it then depends upon the facts of each case whether, with regard to the proceeds, the bank is a trustee or a debtor.

As a general proposition of law it was observed by the court that as soon as the stage of the collection is reached and the proceeds are realized, the question must always be asked whether those sale proceeds are impressed with a trust or is the Bank entitled to use those sale proceeds as part of its general funds? And the answer to that question must depend not on an abstract proposition of law, but on the facts of each case.

Constructive Trustee

Under this head liability of bank shall be discussed when it acts as an agent of the person who has committed a breach of the trust. As the principle evolved through the case of Barnes v. Addy,[xx]the liability on a stranger to the trust could be imposed in the circumstances where he knowingly assisted the dishonest trustee and received/dealt with a trust fund in breach of trust.

Noteworthy are the observations made by Lord Selborne which are chanted by every scholar confronting this subject as a sacred text, “those who create a trust cloth the trustee with legal power and control over the trust property, imposing on him a corresponding liability.

That responsibility may no doubt be extended in equity to others who are not properly trustees if they are found either making themselves de son tort or actually participating in any fraudulent conduct of the trustee…but on the other hand strangers are not be held made constructive trustees merely because they act as agents of trustees in transactions within their legal powers…unless those agents receive and become chargeable with some part of the trust property or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees…”[xxi]

Statutory provisions

Section 6 of the Banking Regulations Act, 1949 authorizes the bank to act as trustee as a part of its banking function. However, the standard of care that a bank has to adopt in such cases is higher than that of a standard of ordinary prudence. It was held in the case of Bartlett v. Barclays Bank Trust Co Ltd[xxii]that a professional corporate trustee, such as a bank, owed a higher duty of care and was liable for loss caused to a trust by neglect to exercise the special care and expertise that it professed to possess.

As a general rule, trustee if earns a profit by using the trust funds, it has to account for it. However, in the cases where a bank is acting as a trustee and it puts the trust funds on deposit with itself, the terms of the charging clause in the trust instrument may be such which exclude the bank from having to account to the beneficiaries, for profit from employing the trust money in its business.[xxiii]

The case of Canara Bank v. NTPC[xxiv]serves as a good illustration where the bank is acting as an agent under s.6 of the Banking Regulation Act. Reiterating what has already been mentioned in the preceding sections, it was held that the bank cannot mix the funds/proceeds of the trust with that of its own.

Courts have also held that the amounts forwarded by the subscribers, under various provisions of Companies Act create a statutory trust to the extent of allotment money for the benefit of the company and to the extent of the balance for the benefit of the subscribers.[xxv]

It was held in the case of RBI v. Bank of Credit and Commerce International Ltd.[xxvi]the money under such cases is forwarded for a specific purpose; hence the same is impressed with trust throughout primarily for the benefit of subscribers and secondarily for the benefit of the company.

In Re: Ballantyne v. Nanwa Gold Mines Ltd[xxvii]the question that came for adjudication in relation to the issue under discussion was whether the amount collected from the intending subscribers to the issue in pursuance of the circular issued by the company can also be said to impress with a trust. In this case, also it was opined by the court that the subscription amounts were impressed with the trust and were not the assets of the company.

It was explained by the court that the underlying principle for such a conclusion is that the banker to the issue collects the money from the subscribers as an agent of the company and holds the money in a fiduciary capacity. The bank holds the said amount as a specific deposit for a specific purpose so as to ensure refund to the subscribers in the event of refund becoming payable.


Lastly, we conclude this present research work in this following manner.

Mere entrustment of money with the bank does not put the bank in a state of the trustee. There has to be something else on the facts to dispel the presumption of a debtor-creditor relationship.

With respect to trust accounts, not only the actual notice but even constructive notice would suffice to hold banks liable as a trustee. However, if the bank under the circumstances cannot be said to have the knowledge of the trust, it can not be held liable.

In dealing with trust accounts the bank also has to ensure that the trustees’ act within the scope of their power. This merely indicates that the bank can not wilfully shut its eyes to blatant breach of trust.

If the money is entrusted with the bank for a special purpose until the fulfillment of the same the funds remain with the bank in its capacity as a trustee.

A bank, when receives money with a special instruction to retain the same pending further instructions it holds them in its capacity as a trustee until the fulfillment of instructions. Sometimes, even after the purpose for which the money was entrusted has been carried out, in the absence of further instructions, the bank does not cease to be a trustee.

Bank while acting as a collecting agent is a trustee so long as the bill is not realized or not collected. But as soon as the bill is collected it then depends upon the facts of each case whether, with regard to the proceeds, the bank is a trustee or a debtor.

With respect to constructive trusteeship, the law in its present state is unsatisfactory for being uncertain. There exists no definite criterion or test to determine the meaning ‘dishonest’ and that of ‘knowledge’. Even in the cases of ‘knowing receipt’ the term ‘beneficial receipt’ is presently interpreted without having regard to banking practices. Hence need exists for reform.

As per Section 6 of the Banking Regulation Act, banks can perform the functions of a trustee with a higher standard of care than what normally exists for others.

Also, the amounts forwarded by the subscribers, under various provisions of Companies Act make the bank a statutory trustee.

Formatted on February 17th, 2019.



[ii] visited on 21st April 2015 at 3PM.


[iv]A Arora, “The Bank’s Liability As A Constructive Trustee”, Journal of Business Laws, 1990, 217, p.218.

[v]Halsbury’s Laws of England, Vol.3(1), para 155


[vii](1871)24 LT 198 cited from Halsbury’s Laws of England, 4th edn., Vol.3(1), para 155.

[viii]E P Ellinger, Modern Banking Law, (Oxford: Clarendon Press, 1994), p.241.


[x](1871)24 LT 198 cited from Halsbury’s Laws of England, 4th edn., Vol.3(1), para 155.

[xi]E P Ellinger, Modern Banking Law, (Oxford: Clarendon Press, 1994), p.241.


[xiii][1978]3 All ER 370.

[xiv][1891] AC 282, see , E P Ellinger, Modern Banking Law, (Oxford: Clarendon Press, 1994), p.241.

[xv]AIR 1967 Bom 279.

[xvi](1955)57 Bom L R 993 cited from M P State Co-operative Bank v. P D Dalal AIR 1967 Bom 279, p.281.

[xvii]AIR 1962 SC 1003.

[xviii]AIR 1940 Mad 441

[xix]AIR 1958 Bom 100.

[xx](1875)9 Ch. App. 244.

[xxi]A Arora, “The Bank’s Liability As A Constructive Trustee”, Journal of Business Laws, 1990, 217, p.220.

[xxii][1980] 1All ER 139, In the present case question arose with regard to breach of trust. A settlement was entered into by the settler for the benefit of his wife. The trustee of the settlement was a bank and subsequently a trust corporation controlled by the bank. Now this trust had major shareholding in the BTL (private company) and therefore bank as trustee had a controlling interest and duty with regard to the management of company. Later after several years chairman came up with the proposal of investing the available private company funds for development projects but the proposal was not linked to the proposed public quotation which the bank had earlier said that it would give favourable consideration.  This was a major change for direction for the private company but the bank representative at the meeting did not raise any objections to it and that the bank has not yet given approval to such a change in investment policy. Company suffered substantial losses due to hazardous investment in property development. Question arises whether the bank is in breach of trust or not. Whether the bank is under any duty to obtain regular flow of information from board and whether bank is entitled to set-off profit from one speculative investment against loss in another.

[xxiii]Halsbury’s Laws of England, Vol.3(1), para 157.


[xxv]RBI v. Bank of Credit and Commerce International Ltd. MANU/MH/0097/1992.

[xxvi]MANU/MH/0097/1992. Here, Varun Shipping Co. Ltd. had made asked the official liquidator of the first respondent bank to pay to the applicant the amounts that were collected by the respondent no. 1 by way of subscription money in respect of the public issue of fully convertible debentures along with interest accrued thereon.

[xxvii][1955] 3 All ER 210.

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